U.S. trade policy is harming domestic manufacturing businesses while technology companies are still going strong.

 

 

Q2 2018

Year to Date

Since Inception (Annualized)

Inception Date: 11/1/2010

Motley Fool Small-Mid Cap Growth Fund (TMFGX)

0.16%

3.66%

13.98%

Russell 2500 Growth Index*

5.53%

8.04%

14.61%

For a standardized list of performance for the Great America Fund, please click here. For fund holdings, please click here.

At the halfway mark of 2018, the Motley Fool Small-Mid Cap Growth Fund is trailing its benchmark, the Russell 2500 Growth Index. As active managers, we know there will be periods of time when we trail our benchmark, but that doesn’t mean we are satisfied with our performance while it’s happening. What we can promise our shareholders is that we will adhere to our investment process and continue to look for high-quality businesses that we can, ideally, own for many years.

Over the first six months of the year, the economic narrative in the U.S. has shifted from euphoria around the corporate tax cuts to escalating concern over tariffs and disruption to global trade. Iconic American manufacturers like General Motors and Harley Davidson have spoken out in strong terms against tariffs imposed by the U.S. on imported steel and aluminum. The higher costs of these metals increase the cost of manufacturing a car or motorcycle. This cost will either be passed along to the consumer, making it more expensive to buy a vehicle, or the company will have to accept lower profit margins. The second effect is retaliatory tariffs from the European Union, which make it more expensive for a European consumer to buy a Harley that was made in America. Europe is Harley Davidson’s second largest market. To avoid the tariffs from the EU, Harley is shifting production of its bikes for the European market out of the U.S. and into its international facilities.

We do not own General Motors or Harley Davidson in the fund, but the issues facing those high-profile companies also affect companies we do own: LCI Industries and Thor Industries. Thor Industries is a domestic manufacturer of recreational vehicles, and LCI Industries is a domestic manufacturer of components used in recreational vehicles. Both of these companies have disclosed to shareholders that they are seeing higher steel and aluminum costs due to the tariffs. These were our two worst-performing stocks in Q2, with Thor’s shares down 15.1%, and LCI’s shares down 12.8%. Since these companies were two of our largest holdings, their poor performance is a drag on our overall performance this year. Taking a longer perspective, we have owned LCI and Thor since the start of the fund in November 2010, and they have done very well for us. We care a lot more about long-term performance than quarterly volatility.

Our top two performing stocks in the quarter were Align Technology (up 36.2%) and Tractor Supply (up 21.9%). I attended Align’s Investor Day on May 23 and came away quite impressed with the company’s management team. They gave a clear description of how all of the different parts of the business, from digital scanners to their massive 3D printing manufacturing facility, all work together to support Invisalign’s growth. For those who are not familiar, Invisalign is a clear plastic orthodontic device used to straighten teeth. It is an alternative to metal braces.

During the second quarter, we sold out of Oaktree Capital Group and Genesee & Wyoming. We opened new positions in Newmark Group, Paylocity, and Teladoc. The newcomers are all successfully using technology to drive growth in their businesses. Newmark is a commercial real-estate services company, Paylocity provides human resources software, and Teladoc enables virtual doctor’s office visits.

The Small-Mid Cap Growth Fund changed its name from The Great America Fund on December 31, 2017.

Note: The Morningstar RatingTM for funds, or 'star rating', is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. As of 6/30/2018, the Motley Fool Small-Mid Cap Growth Fund (Investor shares) was rated in the Mid Cap Growth Funds category, receiving a three-star rating among 541 funds over a three-year period and a four-star rating among 480 funds over a five-year period.

Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10- year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Past performance is no guarantee of future results.

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